OpenAI has been an investor favorite, having raised over $168 billion so far. But without a profitable business model in sight, big tech investors like Nvidia and Microsoft are starting to slow down.
On Wednesday, Nvidia CEO Jensen Huang said the company will invest another $30 billion in OpenAI, but said it “could be the last time” the company will invest in the Sam Altman-led AI giant until it goes public.
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Separately, Huang said a previously touted $100 billion investment in infrastructure “is not in the cards.”
However, the investment Nvidia is making is still considerable and experts warn that it is a big risk.
“Thirty billion dollars is about one-eighth of their (Nvidia’s) annual revenue. It’s about 50 percent of their quarterly revenue that they just announced. It’s significant,” Aleksandar Tomic, associate dean for strategy, innovation and technology at Boston College, told Al Jazeera.
Nvidia’s latest quarterly earnings beat estimates, and the world’s most valuable company expects first-quarter sales of $78 billion, according to data compiled by LSEG. Fourth-quarter revenue topped $68 billion, up 73 percent from the same period last year, beating analysts’ expectations.
However, the stock fell more than 9 percent that week following its earnings, as investors fear whether Nvidia’s huge investments in artificial intelligence companies like OpenAI (currently valued at $730 billion) will pay off.
“I don’t think anyone knows how to properly value anything AI-related. We’re still waiting to see how these companies will monetize what they produce and where customers will actually find value. Will it be subscriptions? That segment doesn’t seem big enough to justify the valuations we’re seeing,” Tomic says.
“It’s very difficult to assign a clear value to all of this. The potential is huge, but it’s like the Internet in the late ’90s. The promise is there, even if the business model is not yet fully formed.”
In November, HSBC forecast that despite a growing user base, OpenAI’s computing power obligations will reach $1.4 trillion by 2033. OpenAI later clarified that they would be closer to $600 billion by 2030, but just the rental space for all those data centers, for example, will cost $620 billion, the analysts note.
Microsoft stock faced a similar phenomenon to Nvidia. In January, the Redmond, Washington-based tech giant reported a relatively strong earnings report, but hidden within it was a slowdown in the growth of its Azure cloud computing product, as capital expenditures grew 66 percent compared to the same period a year earlier. OpenAI provides enterprise access by hosting the technology for those using Azure services.
Microsoft shares fell 11 percent following its January earnings report. The stock is down 18 percent so far this year.
“OpenAI needs to generate $200 billion in annual revenue by 2030 to justify its projections. That’s 15x growth in five years while costs continue to skyrocket,” said George Noble, a veteran financial analyst, in a post on X.
“Diminishing returns are becoming impossible to hide. Competitors are catching up. Lawsuits are piling up,” Noble added.
OpenAI has faced copyright infringement lawsuits, such as one in New York claiming that text generated by OpenAI’s ChatGPT violates authors’ copyright protections. Others have alleged that ChatGPT played a role in the suicides; For example, a lawsuit filed in Colorado claimed that ChatGPT acted as a “suicide coach” in the death of a 40-year-old man.
Noble did not respond to Al Jazeera’s request for additional information.
Despite the growth that appears for OpenAI, the path to profitability requires significant investment.
“Specifically for OpenAI, they don’t have the deep pockets they need to get through the development phase and get to the high-revenue phase,” Sebastian Mallaby, a fellow at the Council on Foreign Relations, who wrote an op-ed in the New York Times predicting the startup would run out of money within 18 months, told Al Jazeera.
“The scale needed to build is totally out of the ordinary. They need a huge amount of money.”
OpenAI is roughly $100 billion in debt, and that burden falls on the investors who fund its ecosystem and its needs, including its push for data center infrastructure.
Tomic maintains that despite the warning signs, investors continue to invest money for fear of being left out.
“I would say the only thing worse than losing money with OpenAI is being completely left behind,” Tomic said.
“I think part of this is (companies) investing to keep up with the Joneses, get a leg up on this new technology and hope to find a path,” Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors, told Al Jazeera.
“To become profitable, they really need to transition from what is essentially a subsidized research lab to an enterprise software giant, where their core products are used by everyone. Right now they have 900 million users, but most of those users are not paying for the product,” Schulman said.
An OpenAI bubble
Mallaby maintains that there is a bubble, but not for AI, only for OpenAI. He maintains that OpenAI has no other products to fall back on.
If OpenAI ends up failing, Microsoft and Nvidia could be affected, but it is unlikely to be significant, given the diversification of investments.
“Nvidia will still sell chips, just to other players, so I don’t think it will significantly affect Nvidia. Microsoft may lose some of its investment in OpenAI, but it will still survive. It would be a failed experiment, similar to Meta’s failed bet on the metaverse,” Schulman added.
Nvidia maintains partnerships with its competitor Anthopric, for example, in which it invested $10 billion in November. And Microsoft maintains revenue from its other products.
“I don’t think any of these are business-ending investments. Microsoft hasn’t invested enough money in OpenAI that its survival depends on it. That’s not the case. The company still has Microsoft Office, its operating systems business, and many other revenue streams. As far as I know, these are not company-ending bets. If the stock takes a hit, it takes a hit,” Tomic said.
“How does that affect investors? It depends. If you’re young, you need to be patient and avoid panicking; over time, stocks can recover. If you’re about to retire, it’s harder, because you may not have time to wait for a rebound.”
However, an OpenAI failure impacts more than just tech stocks and their investors. It will have a downstream effect on other companies that have signed agreements with OpenAI for use on their intellectual property, including Disney.
In December, Disney invested $1 billion in the company. The deal would allow the use of its characters across all franchises on its Sora video generation platform. As part of the deal, it would limit the use of Disney characters on the app.
Tomic believes an industry-wide bubble is coming, comparing it to the dot-com bubble.
“It seems like the only question is when they would explode. If we draw a parallel, there are a lot of similarities with the late 90s and early 2000s, before the technological explosion. Back then, everything was dotcom, just add a ‘.com’ and valuations skyrocketed. Now, everything is AI, powered by AI. There is a lot of exuberance right now,” Tomic said.
“There are a lot of circular deals, right? Nvidia is investing in OpenAI, and then OpenAI commits to buying chips from Nvidia. That’s reminiscent of the early 2000s.”
For example, in 2019, Microsoft invested $13.75 billion in the startup, which is now worth $135 billion and is set to potentially invest up to $10 billion in the company. In October, OpenAI announced a deal with Microsoft to buy $250 billion worth of Azure, the Redmond, Washington-based tech giant’s cloud computing platform.
Comparably, in September, Oracle agreed to a $300 billion contract with OpenAI to build data centers across the United States; OpenAI will then pay Oracle to use the data centers.
In June, a survey of 150 executives at the Yale Executive Leadership Institute’s CEO Summit suggested that 40 percent believe the overblown hype about the AI sector will lead to a market correction.
OpenAI did not respond to Al Jazeera’s request for an interview for this story.
